FSP Franklin Street Properties Corp

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

        The following is a general summary of the material United States federal income tax considerations associated with the ownership and disposition of our stock and debt securities. The following summary is not exhaustive of all possible tax considerations. Moreover, the summary contained herein does not address all aspects of taxation that may be relevant to particular stockholders and holders of our debt securities in light of their personal tax circumstances, or to certain types of stockholders and holders of debt securities subject to special treatment under federal income tax laws, including insurance companies, tax-exempt organizations (except to the extent discussed below under the headings "Taxation of Tax-Exempt Stockholders" and "Taxation of Tax-Exempt U.S. Holders"), financial institutions, broker-dealers, and foreign corporations and persons who are not subject to United States taxation on their worldwide income (except to the extent discussed below under the headings "Taxation of Non-U.S. Stockholders" and "Taxation of Non-U.S. Holders").

        We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, which we refer to as the tax code. Generally, a company that meets the eligibility requirements for treatment as a REIT and that elects to be so treated is not subject to federal income tax on the income it distributes to its stockholders. We believe that we have been organized and have operated in a manner so as to meet these eligibility requirements; however, there can be no assurance that we have qualified or will remain qualified as a REIT. Our counsel, Wilmer Cutler Pickering Hale and Dorr LLP, has rendered its opinion, based upon various assumptions specified therein and upon our representations as to, among other things, our organization, ownership and operations that we qualified to be taxed as a REIT for each taxable year beginning with our taxable year ending December 31, 2002 and that our organization, ownership and proposed method of operation, will enable us to continue to qualify as a REIT. Qualification as a REIT, however, depends upon our ability to meet, through actual annual (or in some cases quarterly) operating results, requirements (discussed in greater detail below) relating to, among other things, the sources of our income, the nature of our assets, the level of our distributions and the diversity of our share ownership. Wilmer Cutler Pickering Hale and Dorr LLP has not reviewed and will not review these results on an independent or ongoing basis. Given the complex nature of the REIT qualification requirements, the ongoing importance of factual determinations and the possibility of future changes in our circumstances, there can be no assurance that our actual operating results will satisfy the requirements for taxation as a REIT under the tax code for any particular taxable year.

        The statements in this summary are, and the opinion of Wilmer Cutler Pickering Hale and Dorr LLP is, based on the provisions of the tax code, applicable United States Treasury regulations promulgated thereunder, and judicial and administrative decisions and rulings all as in effect on the date rendered. Neither the statements below nor the opinion is binding on the Internal Revenue Service, which we refer to as the IRS, or the courts, and there can be no assurance that the IRS or the courts will not take a contrary view. No ruling from the IRS has been or will be sought. Future legislative, judicial or administrative changes or interpretations could alter the statements and conclusions set forth herein, possibly adversely.

EACH STOCKHOLDER, HOLDER OF DEPOSITARY SHARES AND HOLDER OF DEBT SECURITIES IS URGED TO CONSULT HIS, HER, OR ITS OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO THE STOCKHOLDER, HOLDER OF DEPOSITARY SHARES AND HOLDER OF DEBT SECURITIES OF THE OWNERSHIP AND DISPOSITION OF STOCK, DEPOSITARY SHARES OR DEBT SECURITIES IN AN ENTITY ELECTING TO BE TAXED AS A REIT, INCLUDING FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES, AS WELL AS POTENTIAL CHANGES IN THE APPLICABLE TAX LAWS.

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Tax Consequences of REIT Election

        Introduction.     We have elected under Section 856 of the tax code to be taxed as a REIT. Subject to the risks described above, we intend to continue to be taxed as a REIT.

Taxation of FSP Corp.

        General.     If we continue to qualify as a REIT, we generally will not be subject to federal corporate income taxes on our net income to the extent that the income is currently distributed to our stockholders. The benefit of this tax treatment is that it substantially eliminates the "double taxation" resulting from the taxation at both the corporate and stockholder levels that generally results from owning stock in a corporation. Accordingly, our income generally will be subject to taxation solely at the stockholder level upon a distribution by us. We will, however, be required to pay certain federal income taxes, including in the following circumstances:

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We will be subject to federal income tax at regular corporate rates on taxable income, including net capital gain, that we do not distribute to stockholders during, or within a specified time period after, the calendar year in which such income is earned.



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We will be subject to a 100% tax on net income from certain sales or other dispositions of property that we hold primarily for sale to customers in the ordinary course of business, also known as "prohibited transactions."



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If we fail to satisfy the 75% gross income test or the 95% gross income test, both described below, but nevertheless qualify as a REIT, we will be subject to a 100% tax on an amount equal to (i) the gross income attributable to the greater of the amount by which we fail the 75% or 95% gross income test multiplied by (ii) a fraction intended to reflect our profitability.



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If we fail to satisfy the asset tests (other than certain de minimis failures), described below, then, as long as the failure was due to reasonable cause and not to willful neglect, we must dispose of the non-qualifying assets within a specified period of time and we will be subject to a tax equal to the greater of $50,000 and the highest corporate tax rate multiplied by the income generated by the non-qualifying assets for the period beginning with the first date of the failure and ending on the date that we disposed of the assets.



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If we fail to distribute during the calendar year at least the sum of (i) 85% of our REIT ordinary income for such year, (ii) 95% of our REIT capital gain net income for such year, and (iii) any undistributed taxable income from prior periods, we will pay a 4% excise tax on the excess of such required distribution over the amount actually distributed to our stockholders, plus any retained amounts on which income tax has been paid at the corporate level.



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We may elect to retain and pay income tax on some or all of our long-term capital gain, as described below.



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Any taxable REIT subsidiaries of ours generally will be required to pay federal corporate income tax on their earnings.



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We may be subject to a 100% excise tax on certain types of transactions or arrangements with any of our taxable REIT subsidiaries that are not conducted on an arm's-length basis.



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Provided we do not make an election to receive different tax treatment under applicable Treasury Regulations, if we acquire an asset from a corporation that is or has been a C corporation in a transaction in which our basis in the asset is determined by reference to the C corporation's basis in the asset, and we subsequently recognize gain on the disposition of the asset during the five-year period beginning on the date on which we acquired the asset, then we will be required to pay tax at the highest regular corporate tax rate on this gain to the extent of

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the excess of (1) the fair market value of the asset over (2) our adjusted tax basis in the asset, in each case determined as of the date on which we required the asset.

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If we fail to satisfy one or more of certain other requirements for REIT qualification for reasonable cause and not due to willful neglect, then in order to avoid disqualification as a REIT, we would be required to pay a penalty of $50,000 for each such failure.

Requirements for Qualification as a REIT

        Introduction.     In order to qualify as a REIT for federal income tax purposes, a REIT must elect (or have elected, and have not revoked its election) to be treated as a REIT and must satisfy certain statutory tests relating to, among other things, (i) the sources of its income, (ii) the nature of its assets, (iii) the amount of its distributions, and (iv) the ownership of its stock. We have elected to be treated as a REIT and have endeavored, and we will continue to endeavor, to satisfy the tests for REIT qualification.

        A REIT may own a "qualified REIT subsidiary." A qualified REIT subsidiary is a corporation, all of the capital stock of which is owned by a REIT, and for which no election has been made to treat it as a "taxable REIT subsidiary" (as discussed below). A corporation that is a qualified REIT subsidiary is not treated as a corporation separate from its parent REIT for federal income tax purposes. All assets, liabilities, and items of income, deduction, and credit of a qualified REIT subsidiary are treated as the assets, liabilities, and items of income, deduction and credit of the parent REIT. Thus, in applying the requirements described herein, any qualified REIT subsidiary of ours will be ignored, and all assets, liabilities and items of income, deduction and credit of such subsidiary will be treated as our assets, liabilities, and items of income, deduction and credit. Similar treatment will apply with respect to any other entities owned by us that are disregarded as separate entities for federal income tax purposes.

        In the event that we are or become a partner in a partnership (or a member in a limited liability company treated as a partnership for federal income tax purposes), for purposes of determining our qualification as a REIT under the tax code, we will be deemed to own a proportionate share (based upon our share of the capital of the partnership) of the assets of the partnership and will be deemed to be entitled to the income of the partnership attributable to such share. In addition, the assets and income of the partnership so attributed to us will retain their same character as in the hands of the partnership.

        A REIT may own up to 100% of the stock of one or more taxable REIT subsidiaries. A taxable REIT subsidiary may earn income that would not be qualifying income, as described below, if earned directly by the parent REIT and may own assets that would not be qualifying assets, as described below, if owned directly by a REIT. Both the subsidiary and the parent REIT must jointly elect to treat the subsidiary as a taxable REIT subsidiary. Overall, not more than 20% (25% for taxable years beginning on or before December 31, 2017) of the value of a REIT's assets may consist of securities of one or more taxable REIT subsidiaries. A taxable REIT subsidiary will pay tax at regular corporate rates on any income that it earns. There is a 100% excise tax imposed on a portion of any income generated from certain transactions or arrangements involving a taxable REIT subsidiary and its parent REIT that are not conducted on an arm's-length basis. An election has been made to treat FSP Investments LLC and FSP Protective TRS Corp., both wholly owned subsidiaries of ours, as taxable REIT subsidiaries. Such subsidiaries pay corporate income tax on their respective amounts of taxable income and their after-tax net income will be available for distribution to us, generally as a dividend.

        Income Tests—General.     We must satisfy annually two tests regarding the sources of our gross income in order to maintain our REIT status. First, at least 75% of our gross income, excluding gross income from certain "dealer" sales and certain foreign currency exchange gains, for each taxable year generally must consist of defined types of income that we derive, directly or indirectly, from

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investments relating to real property or mortgages on real property or temporary investment income, also known as the "75% gross income test." Qualifying income for purposes of the 75% gross income test generally includes:

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"rents from real property" (as described below);



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interest from debt secured by mortgages on real property or on interests in real property;



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dividends or other distributions on, and gain from the sale of, shares in other REITs;



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gain from the sale or other disposition of real property or mortgages on real property;



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amounts (other than amounts the determination of which depends in whole or in part on the income or profits of any person) received as consideration for entering into agreements to make loans secured by mortgages on real property or on interests in real property or agreements to purchase or lease real property;



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gain from the sale or other disposition of a "real estate asset" (other than a non-qualifying publicly offered REIT debt instrument) which is not a prohibited transaction under the federal income tax rules; and



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certain investment income attributable to temporary investment of capital that we raise.

        Second, at least 95% of our gross income, excluding gross income from certain "dealer" sales and certain foreign currency exchange gains, for each taxable year generally must consist of income that is qualifying income for purposes of the 75% gross income test, as well as dividends, other types of interest, and gain from the sale or disposition of stock or securities, also known as the "95% gross income test."

        Income Tests—Rents from Real Property.     Rent that we receive from real property that we own and lease to tenants will qualify as "rents from real property" if the following conditions are satisfied:

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First, the rent must not be based, in whole or in part, on the income or profits of any person. An amount will not fail to qualify as rent from real property solely by reason of its being based on a fixed percentage (or percentages) of sales or receipts.



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Second, neither we nor any direct or indirect owner of 10% or more of our stock may own, actually or constructively, 10% (by vote or value) or more of the tenant from which we collect the rent (subject to exceptions for certain rent from taxable REIT subsidiaries).



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Third, any rent received under a lease that is attributable to personal property will not qualify as rents from real property unless the rent attributable to the personal property leased in connection with the real property constitutes no more than 15% of the total rent received under the lease.



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Finally, we generally must not operate or manage our real property or furnish or render services to our tenants, other than through an "independent contractor" who is adequately compensated and from whom we do not derive revenue or through a taxable REIT subsidiary. We may provide services directly, however, if the services are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered rendered "primarily for the occupant's convenience." In addition, we may render, other than through an independent contractor or taxable REIT subsidiary, a de minimis amount of "non-customary" services to the tenants of a property as long as our income from such services does not exceed 1% of our gross income from the property.

        Although no assurances can be given that either of the gross income tests have been or will be satisfied in any given year, we believe that our operations have allowed and will allow us to meet both the 75% gross income test and the 95% gross income test. Such belief as to future years is premised in

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large part on our expectation that substantially all of the amounts that we receive with respect to our properties will qualify as "rents from real property." There are a variety of circumstances, as described above, however, in which rent received from a tenant will not be treated as rents from real property.

        Income Tests—Failure to Satisfy Gross Income Tests.     If we fail to satisfy either or both of the 75% or 95% gross income tests for a taxable year, we could nevertheless qualify as a REIT for that year if we are eligible for relief under certain provisions of the federal income tax laws. Those relief provisions generally will be available if:

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Following our identification of the failure to meet the gross income test for the taxable year, a description of each item of our gross income included in the 75% and 95% gross income tests is set forth in a schedule for such taxable year filed in accordance with regulations to be prescribed by the Treasury Secretary; and



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Our failure to meet the gross income test was due to reasonable cause and not due to willful neglect.

        It is not possible to state whether we would be entitled to the benefit of the above relief provisions in a particular circumstance that might arise in the future. Furthermore, as discussed above under "Taxation of FSP Corp.—General," even if the relief provisions apply, we would incur a 100% tax on the gross income attributable to the greater of the amounts by which we fail the 75% and 95% gross income tests, multiplied by a fraction that reflects our profitability.

        Asset Tests.     We also must satisfy the following five tests relating to the nature of our assets at the close of each quarter of our taxable year.

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First, at least 75% of the value of our total assets must consist of cash or cash items (including receivables), government securities, or "real estate assets" (including qualifying temporary investments), also known as the "75% asset test";



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Second, no more than 25% of the value of our total assets may be represented by securities other than those that are qualifying assets for purposes of the 75% asset test, also known as the "25% asset test";



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Third, of the investments included in the 25% asset test, the value of any one issuer's securities that we own may not exceed 5% of the value of our total assets, and we may not own more than 10% of the total combined voting power or more than 10% of the total value of the outstanding securities of any issuer, unless we and such issuer make an election to treat the issuer as a taxable REIT subsidiary or the issuer is a "disregarded entity" or partnership for federal income tax purposes or is itself a REIT (the "securities asset test");



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Fourth, while we may own up to 100% of the stock of a corporation that elects to be treated as a taxable REIT subsidiary for federal income tax purposes, the total value of our stock ownership in one or more taxable REIT subsidiaries may not exceed 20% (25% for taxable years beginning on or before December 31, 2017) of the value of our gross assets; and



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Fifth, no more than 25% of the value of our total assets may be represented by nonqualified publicly-offered REIT debt instruments.

        We intend to operate so that we will not acquire any assets that would cause us to violate any of the asset tests. If, however, we should fail to satisfy any of the asset tests at the end of a calendar quarter, we would not lose our REIT status if (1) we satisfied the asset tests at the close of the preceding calendar quarter, and (2) the discrepancy between the value of our assets and the asset test requirements arose from changes in the market values of our assets and was not wholly or partly caused by the acquisition of one or more nonqualifying assets. If we did not satisfy the condition described in clause (2) of the preceding sentence, we could still avoid disqualification as a REIT by

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eliminating any discrepancy within 30 days after the close of the calendar quarter in which the discrepancy arose.

        We may also be able to avoid disqualification as a REIT as a result of a failure of the asset tests if:

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Such failure is a failure to meet the securities asset test and is due to the ownership of securities the total value of which does not exceed the lesser of $10 million and 1% of the total value of our assets at the end of the quarter, which is referred to as the de minimis threshold, and we dispose of the securities in order to satisfy the securities asset test within six months after the last day of the quarter in which we identified the failure or such other time period prescribed by the Treasury Secretary and in the manner prescribed by the Treasury Secretary; or



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In the case of any other failure, (1) we prepare a schedule that sets forth each asset that causes us to fail the asset test and file such schedule in accordance with regulations to be prescribed by the Treasury Secretary, (2) the failure to satisfy the asset test is due to reasonable cause and is not due to willful neglect, (3) we dispose of the assets set forth on the schedule within six months after the last day of the quarter in which we identified the failure or such other time period prescribed by the Treasury Secretary and in the manner prescribed by the Treasury Secretary and (4) we pay a tax equal to the greater of $50,000 or an amount equal to the highest corporate tax rate multiplied by the net income generated by the non-qualifying asset for the period beginning on the first date of the failure and ending on the date that we disposed of the asset.

        Distribution Requirements.     Each taxable year, we must distribute dividends to our stockholders in an amount at least equal to:

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Ninety percent (90%) of our "REIT taxable income," computed without regard to the dividends paid deduction and our net capital gain or loss; plus



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Ninety percent (90%) of our after tax net income, if any, from foreclosure property; minus



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Certain items of noncash income.

        We must make such distributions in the taxable year to which they relate, or in the following taxable year if we declare the distribution before we timely file our federal income tax return for such year and pay the distribution on or before the first regular distribution date after such declaration. Further, if we fail to meet the 90% distribution requirement as a result of an adjustment to our tax returns, we may, if the deficiency is not due to fraud with intent to evade tax or a willful failure to file a timely tax return, and if certain other conditions are met, retroactively cure the failure by paying a deficiency dividend (plus interest to the IRS) to our stockholders.

        We will be subject to federal income tax on our taxable income, including net capital gain that we do not distribute to our stockholders. Furthermore, if we fail to distribute during a calendar year, or, in the case of distributions with declaration and record dates falling within the last three months of the calendar year, by the end of the January following such calendar year, at least the sum of:

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Eighty-five percent (85%) of our REIT ordinary income for such year;



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Ninety-five percent (95%) of our REIT capital gain net income for such year; and



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Any of our undistributed taxable income from prior periods,

        we will be subject to a 4% nondeductible excise tax on the excess of such required distribution over the amount actually distributed. If we elect to retain and pay income tax on the net capital gain that we receive in a taxable year, we will be deemed to have distributed any such amount for the purposes of the 4% excise tax described in the preceding sentence.

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        We intend to make distributions to holders of our stock in a manner that will allow us to satisfy the distribution requirements described above. It is possible that, from time to time, our pre-distribution taxable income may exceed our cash flow and that we may have difficulty satisfying the distribution requirements. We intend to monitor closely the relationship between our pre-distribution taxable income and our cash flow and intend to borrow funds or liquidate assets in order to overcome any cash flow shortfalls if necessary to satisfy the distribution requirements imposed by the tax code. It is possible, although unlikely, that we may decide to terminate our REIT status as a result of any such cash shortfall. Such a termination would have adverse tax consequences to our stockholders. See "Taxation of FSP Corp.—General."

        Recordkeeping Requirements.     We must maintain records of information specified in applicable Treasury Regulations in order to maintain our qualification as a REIT. In addition, in order to avoid monetary penalties, we must request on an annual basis certain information from our stockholders designed to disclose the actual ownership of our outstanding stock. We intend to comply with these recordkeeping requirements.

        Ownership Requirements.     For us to qualify as a REIT, shares of our stock must be held by a minimum of 100 persons for at least 335 days in each taxable year. Further, at no time during the second half of any taxable year may more than 50% of our shares be owned, actually or constructively, by five or fewer "individuals" (which term is defined for this purpose to include certain tax-exempt entities including pension trusts). Our stock will be held by 100 or more persons. We intend to continue to comply with these ownership requirements. Also, our charter contains ownership and transfer restrictions designed to prevent violation of these requirements.

        Failure to Qualify.     If we fail to satisfy any of the above requirements (other than the income and asset tests) for a taxable year and no relief provisions in effect for such years applied, then we could nevertheless qualify as a REIT if:

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Such failures are due to reasonable cause and not due to willful neglect, and



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We pay (in the manner prescribed by the Treasury Secretary in regulations) a penalty of $50,000 for each such failure.

        It is not possible to state whether we would be entitled to the benefit of the relief provisions in a particular circumstance. If such relief is not available, we would fail to qualify as a REIT.

        If we do fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at regular corporate rates. In calculating our taxable income in a year in which we did not qualify as a REIT, we would not be able to deduct amounts paid out to our stockholders. We would not be required to distribute any amounts to our stockholders in such taxable year. In such event, to the extent of our current and accumulated earnings and profits, all distributions to stockholders would be characterized as dividends and would be taxable as ordinary income. Non-corporate stockholders, however, could qualify for a lower maximum tax rate on such dividends in most circumstances. Moreover, subject to certain limitations under the tax code, corporate stockholders might be eligible for the dividends received deduction. Unless we qualified for relief under specific statutory provisions, we would be disqualified from taxation as a REIT for the four taxable years following the year in which we ceased to qualify as a REIT. We cannot predict whether we would qualify for such statutory relief in a particular circumstance that might arise in the future.

Taxation of Taxable U.S. Stockholders

        For purposes of this discussion, the term "U.S. stockholder" means a stockholder of common or preferred shares that, for United States federal income tax purposes, is a "U.S. person." The term

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"U.S. person," as used herein, means a beneficial owner of our securities that, for United States federal income tax purposes, is:

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a citizen or resident of the United States;



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a corporation (including any entity treated as a corporation) created or organized under the laws of U.S., any State thereof or the District of Columbia;



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a trust if it (1) is subject to the primary supervision of a court within the U.S. and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person; or



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an estate the income of which is subject to U.S. federal income tax regardless of its source.

        If a partnership (or other entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds our securities, the tax treatment of a partner in the partnership as a U.S. person or otherwise will generally depend upon the status of the partner and the activities of the partnership. If you are a partnership or a partner of a partnership holding our securities, you should consult your tax advisor regarding the tax consequences of the ownership and disposition of our securities.

        A U.S. stockholder is a "taxable U.S. stockholder" if the stockholder is subject to U.S. federal income tax. For any taxable year in which we qualify as a REIT, amounts distributed to taxable U.S. stockholders will be taxed as follows.

        Distributions Generally.     Distributions made to our taxable U.S. stockholders out of current or accumulated earnings and profits (and not designated as a capital gain dividend) will be taken into account by such stockholder as ordinary income and will not, in the case of a corporate taxable U.S. stockholder, be eligible for the dividends-received deduction. In addition, such dividends will not qualify for the lower maximum tax rate currently applicable to dividends received by non-corporate taxpayers except to the extent that they were attributable to qualified dividend income we received from other corporations during the taxable year or to certain income previously taxed to us. However, under recently enacted tax legislation, individuals, trusts and estates may deduct up to 20% of certain pass-through income, including ordinary REIT dividends that are not "capital gain dividends" or "qualified dividend income" subject to certain complex limitations. To the extent that we make a distribution with respect to our stock that is in excess of our current or accumulated earnings and profits, the distribution will be treated by a taxable U.S. stockholder first as a tax-free return of capital, reducing the taxable U.S. stockholder's tax basis in our stock, and any portion of the distribution in excess of the stockholder's tax basis in our stock will then be treated as gain from the sale of such stock. For purposes of determining the portion of distributions on separate classes of shares that will be treated as dividends for federal income tax purposes, current and accumulated earnings and profits will be allocated to distributions attributable to priority rights of shares of preferred stock before being allocated to other distributions. Dividends that we declare in October, November, or December of any year payable to a taxable U.S. stockholder of record on a specified date in any such month shall be treated as both paid by us and received by stockholders on December 31 of such year, provided that the dividend is actually paid by us during January of the following calendar year. Taxable U.S. stockholders may not include on their federal income tax returns any of our tax losses.

        Capital Gain Dividends.     Dividends to taxable U.S. stockholders that properly are designated by us as capital gain dividends will be treated by such stockholders as long-term capital gain, to the extent that such dividends do not exceed our actual net capital gain, without regard to the period for which the taxable U.S. stockholders have held our stock. If we properly designate any portion of a dividend as a capital gain dividend, except as otherwise provided by law, we intend to allocate such capital gain dividends in accordance with Revenue Ruling 89-81, which requires that distributions made to different classes of shares be composed proportionately of dividends of a particular type. Taxable U.S. stockholders that are corporations may be required, however, to treat up to 20% of particular capital

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gain dividends as ordinary income. Capital gain dividends, like regular dividends from a REIT, are not eligible for the dividends-received deduction for corporations.

        For taxable U.S. stockholders who are taxable at the rates applicable to individuals, we will classify portions of any capital gain dividend as either (1) a "regular" capital gain dividend taxable to the taxable U.S. stockholder at a maximum rate generally lower than that applicable to ordinary income or (2) an "unrecaptured Section 1250 gain" dividend taxable to the taxable U.S. stockholder at a maximum rate that is between the rate applicable to "regular" capital gain and the rate applicable to ordinary income.

        Retained Capital Gains.     We may elect to retain, rather than distribute, our net long-term capital gain received during the tax year. If we so elect, we will be required to pay tax on the retained amounts. To the extent designated in a notice to the taxable U.S. stockholders, the taxable U.S. stockholders will be required to include their proportionate shares of the undistributed net long-term capital gain so designated in their income for the tax year, but will be permitted a credit or refund, as the case may be, for their respective shares of any tax paid on such gains by us. In addition, each taxable U.S. stockholder will be entitled to increase the tax basis in his or her shares of our stock by an amount equal to the amount of net long-term capital gain the taxable U.S. stockholder was required to include in income, reduced by the amount of any tax paid by us for which the taxable U.S. stockholder was entitled to receive a credit or refund.

        Passive Activity Loss and Investment Interest Limitations.     Distributions, including deemed distributions of undistributed net long-term capital gain, from us and gain from the disposition of our stock will not be treated as passive activity income, and therefore taxable U.S. stockholders will not be able to apply any passive activity losses against such income. Distributions from us, to the extent they do not constitute a return of capital, generally will be treated as investment income for purposes of the investment income limitation on deductibility of investment interest. However, dividends attributable to income that was subject to tax at our level as well as net capital gain from the disposition of our stock or capital gain dividends, including deemed distributions of undistributed net long-term capital gains, generally will be excluded from investment income.

        Sale of FSP Stock.     Upon the sale of our stock, a taxable U.S. stockholder generally will recognize gain or loss equal to the difference between the amount realized on such sale and the holder's tax basis in the stock sold. To the extent that our stock is held as a capital asset by the taxable U.S. stockholder, the gain or loss will be a long-term capital gain or loss if the stock has been held for more than a year, and will be a short-term capital gain or loss if the stock has been held for a shorter period. In general, however, any loss upon a sale of our stock by a taxable U.S. stockholder who has held such stock for six months or less (after applying certain holding period rules) will be treated as a long-term capital loss to the extent that distributions from us were required to be treated as long-term capital gain by that holder.

        Redemption of Preferred Stock.     Preferred stock may be redeemable under certain circumstances described in the applicable prospectus supplement. Any redemption of preferred stock for cash will, to the extent of our current and accumulated earnings and profits, be treated as a distribution taxable as a dividend at ordinary income tax rates, unless the redemption satisfies one of the tests set forth in Section 302(b) of the tax code, in which case it will be treated as a sale or exchange of the redeemed shares. The redemption will be treated as a sale or exchange if it (1) is "substantially disproportionate" with respect to the U.S. stockholder, (2) results in a "complete termination" of the U.S. stockholder's interest in all classes of our stock, or (3) is "not essentially a dividend" with respect to the U.S. stockholder, all within the meaning of Section 302(b) of the tax code. In determining whether any of these tests have been met, there must be taken into account not only ownership in the series or class of the stock being redeemed, but also the U.S. stockholder's ownership of other classes of our stock and other equity interests in us considered to be owned by the U.S. stockholder by reason of certain

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constructive ownership rules set forth in the tax code. Because the determination as to whether any of the alternative tests of Section 302(b) of the tax code will be satisfied with respect to the U.S. stockholder depends on the facts and circumstances at the time the determination is made, U.S. stockholders are urged to consult their tax adviser to determine such treatment. If the redemption is treated as a sale or exchange of the redeemed shares, it will be treated in the same manner as a sale described above in "Taxation of Taxable U.S. Stockholders-Sale of FSP Stock."

        If a redemption of preferred stock does not meet any of the tests under Section 302 of the tax code, the redemption proceeds received from our preferred stock will be treated as a distribution on our stock as described under "Taxation of Taxable U.S. Stockholders- Distributions Generally." If the redemption of a U.S. stockholder's preferred stock is taxed as a dividend, the adjusted basis of such stockholder's redeemed shares will be transferred to any other stock held by the stockholder. If the U.S. stockholder owns no other shares, under certain circumstances, such basis may be transferred to a related person, or it may be lost entirely.

        With respect to a redemption of our preferred stock that is treated as a distribution with respect to our stock, which is not otherwise taxable as a dividend, the IRS has proposed Treasury regulations that would require any basis reduction associated with such a redemption to be applied on a share-by-share basis which could result in taxable gain with respect to some shares, even though the stockholder's aggregate basis for the shares would be sufficient to absorb the entire amount of the redemption distribution (in excess of any amount of such distribution treated as a dividend). Additionally, the proposed Treasury regulations would not permit the transfer of basis in the redeemed shares of the preferred stock to the remaining shares held (directly or indirectly) by the redeemed stockholder. Instead, the unrecovered basis in our preferred stock would be treated as deferred loss to be recognized when certain conditions are satisfied. These proposed Treasury regulations would be effective for transactions that occur after the date the regulations are published as final Treasury regulations. There can, however, be no assurance as to whether, when and in what particular form such proposed Treasury regulation may ultimately be finalized.

        Conversion of Preferred Stock into Common Stock.     Except as provided below, (i) a U.S. stockholder generally will not recognize gain or loss upon the conversion of our preferred stock into our common stock, and (ii) a U.S. stockholder's basis and holding period in the common stock received upon conversion generally will be the same as those of the converted preferred stock (but the basis will be reduced by the portion of adjusted tax basis allocated to any fractional share of common stock exchanged for cash). Any common stock received in a conversion that is attributable to accumulated and unpaid dividends on the converted preferred stock will be treated as a distribution on our shares as described above in "Taxation of Taxable U.S. Stockholders-Distributions Generally." Cash received upon conversion in lieu of a fractional share of common stock generally will be treated as a payment in a taxable exchange for such fractional share of common stock, and gain or loss will be recognized on the receipt of cash in an amount equal to the difference between the amount of cash received and the adjusted tax basis allocable to the factional share of common stock deemed exchanged. This gain or loss will be long-term capital gain or loss if the U.S. stockholder has held the preferred stock for more than one year. See "Taxation of Taxable U.S. Stockholders- Sale of FSP Stock." U.S. stockholders should consult with their tax advisers regarding the U.S. federal income tax consequences of any transaction in which such stockholder exchanges common stock received on a conversion of preferred stock for cash or other property.

Taxation of Owners of Depositary Shares

        Owners of depositary shares generally will be treated for United States federal income tax purposes as if they were direct owners of fractional shares of the preferred stock to which the depositary shares relate. Accordingly, such owners will take into account, for United States federal income tax purposes, income to which they would be entitled if they were the direct owners of the

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fractional interests in such preferred stock and will be subject to other tax considerations in the same manner as if they owned fractional interests directly. See "Taxation of Taxable U.S. Stockholders" and "Other Tax Considerations or Stockholders and Debt Securities."

Taxation of Tax-Exempt Stockholders

        Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts, collectively known as "exempt organizations," generally are exempt from federal income taxation. Exempt organizations are subject to tax, however, on their unrelated business taxable income, or "UBTI." UBTI is defined as the gross income derived by an exempt organization from an unrelated trade or business, less the deductions directly connected with that trade or business, subject to certain exceptions. While many investments in real estate generate UBTI, the IRS has issued a ruling that dividend distributions from a REIT to an exempt employee pension trust do not constitute UBTI, provided that the shares of the REIT are not otherwise used in an unrelated trade or business of the exempt employee pension trust. Based on that ruling, amounts distributed to exempt organizations generally should not constitute UBTI. However, if an exempt organization finances its acquisition of our stock with debt, a portion of its income from us will constitute UBTI pursuant to the "debt-financed property" rules.

        Moreover, social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group leave services plans that are exempt from taxation under special provisions of the tax code are subject to different UBTI rules, which generally will require them to characterize distributions that they receive from us as UBTI. In addition, in certain circumstances, a pension trust that owns more than 10% of our stock will be required to treat a percentage of the dividends paid by us as UBTI based upon the percentage of our income that would constitute UBTI to the stockholder if received directly by it. This rule applies to a pension trust holding more than 10% (by value) of our stock only if (1) the percentage of our income that would be UBTI if we were a pension trust is at least 5% and (2) we are treated as a "pension-held REIT." We do not expect to qualify as a "pension-held REIT."

Taxation of Non-U.S. Stockholders

        General.     The rules governing United States federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships, foreign trusts and certain other foreign stockholders, collectively known as "non-U.S. stockholders," are complex and no attempt is made herein to provide more than a general summary of such rules. This discussion does not consider the tax rules applicable to all non-U.S. stockholders and, in particular, does not consider the special rules applicable to U.S. branches of foreign banks or insurance companies or certain intermediaries. NON-U.S. STOCKHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS WITH REGARD TO THE OWNERSHIP AND DISPOSITION OF OUR STOCK, INCLUDING ANY REPORTING AND WITHHOLDING REQUIREMENTS.

        Ordinary Dividends—General.     Distributions to non-U.S. stockholders that are not attributable to gain from sales or exchanges by us of United States real property interests and are not designated by us as capital gain dividends (or deemed distributions of retained capital gains) will be treated as ordinary dividends to the extent that they are made out of our current or accumulated earnings and profits. Any portion of a distribution in excess of our current and accumulated earnings and profits will not be taxable to a non-U.S. stockholder to the extent that such distribution does not exceed the adjusted basis of the stockholder in our stock, but rather will reduce the adjusted basis of such stock. To the extent that the portion of the distribution in excess of current and accumulated earnings and profits exceeds the adjusted basis of a non-U.S. stockholder for our stock, such excess generally will be treated as gain from the sale or disposition of the stock and will be taxed as described below.

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        Ordinary Dividends—Withholding.     Dividends paid to non-U.S. stockholders may be subject to U.S. withholding tax. If a non-U.S. stockholder's investment in our stock is not effectively connected with a trade or business conducted by the non-U.S. stockholder in the United States (or if a tax treaty does apply and the investment in our stock is not attributable to a United States permanent establishment maintained by the non-U.S. stockholder), ordinary dividends ( i.e. , distributions out of current and accumulated earnings and profits) will be subject to a U.S. withholding tax at a 30% rate, or, if an income tax treaty applies, at a lower treaty rate. Because we generally cannot determine at the time that a distribution is made whether or not such a distribution will be in excess of earnings and profits, we intend to withhold on the gross amount of each distribution at the 30% rate (or lower treaty rate) (other than distributions subject to the 35% FIRPTA withholding rules described below). To receive a reduced treaty rate, a non-U.S. stockholder must furnish us or our paying agent with a duly completed Form W-8BEN or W-8BEN-E (or authorized substitute form) certifying such holder's qualification for the reduced rate. Generally, a non-U.S. stockholder will be entitled to a refund from the IRS to the extent the amount withheld by us from a distribution exceeds the amount of United States tax owed by such stockholder.

        In the case of a non-U.S. stockholder that is a partnership or a trust, the withholding rules for a distribution to such a partnership or trust will be dependent on numerous factors, including (1) the classification of the type of partnership or trust, (2) the status of the partner or beneficiary, and (3) the activities of the partnership or trust. Non-U.S. stockholders that are partnerships or trusts are urged to consult their tax advisors regarding the withholding rules applicable to them based on their particular circumstances.

        If an income tax treaty does not apply, ordinary dividends that are effectively connected with the conduct of a trade or business within the U.S. by a non-U.S. stockholder (and, if a tax treaty applies, ordinary dividends that are attributable to a United States permanent establishment maintained by the non-U.S. stockholder) are exempt from U.S. withholding tax. In order to claim such exemption, a non-U.S. stockholder must provide us or our paying agent with a duly completed Form W-8ECI (or authorized substitute form) certifying such holder's exemption. However, ordinary dividends exempt from U.S. withholding tax because they are effectively connected or are attributable to a United States permanent establishment maintained by the non-U.S. stockholder generally are subject to U.S. federal income tax on a net income basis at regular graduated rates. In the case of non-U.S. stockholders that are corporations, any effectively connected ordinary dividends or ordinary dividends attributable to a United States permanent establishment maintained by the non-U.S. stockholder may, in certain circumstances, be subject to branch profits tax at a 30% rate, or at such lower rate as may be provided in an applicable income tax treaty.

        Capital Gain Dividends—General.     For any year in which we qualify as a REIT, distributions that are attributable to gain from sales or exchanges by us of United States real property interests will be taxed to a non-U.S. stockholder under the provisions of the Foreign Investment in Real Property Tax Act of 1980, also known as "FIRPTA." Under FIRPTA, except as described below, distributions attributable to gain from sales of United States real property are taxed to a non-U.S. stockholder as if such gain were effectively connected with a United States trade or business. Non-U.S. stockholders thus would be taxed at the regular capital gain rates applicable to taxable U.S. stockholders (subject to the applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). Distributions subject to FIRPTA also may be subject to a 30% branch profits tax in the hands of a corporate non-U.S. stockholder not otherwise entitled to treaty relief or exemption.

        A distribution attributable to gain from sales of United States real property is not treated as effectively connected with a United States trade or business provided that (1) the distribution is received with respect to stock that is regularly traded on an established securities market in the United States and (2) the non-U.S. stockholder does not own more than ten percent of the stock at any time during the one-year period ending on the date of such distribution. If these requirements are satisfied,

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the distribution is treated in the manner described above for ordinary dividends rather than being treated as a capital gain dividend, and the distribution is not subject to the branch profits tax. In addition, any distribution to a non-U.S. stockholder that is a "qualified shareholder" or "qualified foreign pension fund" that holds REIT stock directly or indirectly (through one or more partnerships), as discussed below, is not subject to FIRPTA. Instead, such distributions will generally be treated as ordinary dividend distributions and subject to withholding in the manner described above with respect to ordinary dividends.

        A "qualified shareholder" is a foreign person that (1) either is eligible for the benefits of a comprehensive income tax treaty which includes an exchange of information program and whose principal class of interests is listed and regularly traded on one or more recognized stock exchanges (as defined in such comprehensive income tax treaty), or is a foreign partnership that is created or organized under foreign law as a limited partnership in a jurisdiction that has an agreement for the exchange of information with respect to taxes with the United States and has a class of limited partnership units representing greater than 50% of the value of all the partnership units that is regularly traded on the NYSE or Nasdaq markets, (2) is a "qualified collective investment vehicle" (defined below), and (3) maintains records on the identity of each person who, at any time during the foreign person's taxable year, is the direct owner of 5% or more of the class of interests or units (as applicable) described in (1), above. A "qualified collective investment vehicle" is a foreign person that (1) would be eligible for a reduced rate of withholding under the comprehensive income tax treaty described above, even if such entity holds more than 10% of the stock of such REIT, (2) is publicly traded, is treated as a partnership under the tax code, is a withholding foreign partnership, and would be treated as a "United States real property holding corporation," or USRPHC, if it were a domestic corporation, or (3) is designated as such by the Secretary of the Treasury and is either (a) fiscally transparent within the meaning of Section 894 of the tax code, or (b) required to include dividends in its gross income, but is entitled to a deduction for distributions to its investors.

        While a "qualified shareholder" will not be subject to FIRPTA withholding on REIT distributions, certain investors of a "qualified shareholder" (i.e., non-U.S. persons who hold interests in the "qualified shareholder" (other than interests solely as a creditor), and hold more than 10% of the stock of such REIT (whether or not by reason of the investor's ownership in the "qualified shareholder")) may be subject to FIRPTA withholding.

        A "qualified foreign pension fund" includes any trust, corporation, or other organization or arrangement: (1) which is created or organized under the law of a country other than the United States, (2) which is established to provide retirement or pension benefits to participants or beneficiaries that are current or former employees (or persons designated by such employees) of one or more employers in consideration for services rendered, (3) which does not have a single participant or beneficiary with a right to more than 5% of its assets or income, (4) which is subject to government regulation and provides annual information reporting about its beneficiaries to the relevant tax authorities in the country in which it is established or operates, and (5) with respect to which, under the laws of the country in which it is established or operates, contributions to such trust, corporation, organization or arrangement that would otherwise be subject to tax under such laws are deductible or excluded from gross income of such entity or taxed at a reduced rate, or taxation of any investment income of such trust, corporation, organization, or arrangement is deferred or such income is taxed at a reduced rate.

        Capital Gain Dividends—Withholding.     Under FIRPTA, we are required to withhold 35% (or a lower rate set forth in the regulations) of any distribution to a non-U.S. stockholder that is designated as a capital gain dividend or which could be designated as a capital gain dividend. Moreover, if we designate previously made distributions as capital gain dividends, subsequent distributions (up to the amount of the prior distributions so designated) will be treated as capital gain dividends for purposes of FIRPTA withholding. The foregoing withholding requirement will not apply, however, if the

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distribution qualifies for the exceptions described above for distributions with respect to stock that is regularly traded on an established securities market in the United States if the recipient has not owned more than ten percent of our stock during the prior year and distributions made to "qualified shareholders" and "qualified foreign pension funds".

        Sale of Our Stock.     A non-U.S stockholder generally will not be subject to United States federal income tax under FIRPTA with respect to gain recognized upon a sale of our stock, provided that we are a "domestically-controlled qualified investment entity." A domestically-controlled qualified investment entity is defined to include a REIT in which at all times during a specified testing period less than 50% in value of the stock was held directly or indirectly by non-U.S. persons. Although currently it is anticipated that we will be a domestically-controlled qualified investment entity, and, therefore, that the sale of our stock will not be subject to taxation under FIRPTA, there can be no assurance that we will, at all relevant times, be a domestically-controlled qualified investment entity.

        Tax also would not apply to any gain recognized by a non-U.S. stockholder upon the sale of our stock as long as our stock is regularly traded on an established securities market and the stockholder held 10% or less of our stock during the preceding five years (taking into account complicated attribution rules). If the gain on the sale of our stock were subject to taxation under FIRPTA, a non-U.S. stockholder would be subject to the same treatment as taxable U.S. stockholders with respect to such gain (subject to the applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). In addition, a purchaser of our stock from a non-U.S. stockholder subject to taxation under FIRPTA generally would be required to deduct and withhold a tax equal to 15% of the amount realized by a non-U.S. stockholder on the disposition. Any amount withheld would be creditable against the non-U.S. stockholder's FIRPTA tax liability.

        Even if gain recognized by a non-U.S. stockholder upon the sale of our stock is not subject to FIRPTA, such gain generally will subject such stockholder to U.S. tax if:

•

An income tax treaty does not apply and the gain is effectively connected with a trade or business conducted by the non-U.S. stockholder in the United States (or, if an income tax treaty applies and the gain is attributable to a United States permanent establishment maintained by the non-U.S. stockholder), in which case a non-U.S. stockholder will be taxed on his or her net gain from the sale at regular graduated U.S. federal income tax rates. In the case of a non-U.S. stockholder that is a corporation, such stockholder may be subject to a branch profits tax at a 30% rate, unless an applicable income tax treaty provides for a lower rate and the stockholder demonstrates its qualification for such rate; or



•

The non-U.S. stockholder is a nonresident alien individual who holds our stock as a capital asset and was present in the United States for 183 days or more during the taxable year (as determined under the tax code) and certain other conditions apply, in which case the non-U.S. stockholder will be subject to a 30% tax on capital gains.

        Moreover, even if we are a domestically controlled qualified investment entity, upon disposition of our stock (subject to the 10% exception applicable to "regularly traded" stock and exceptions for "qualified shareholders" and "qualified foreign pension funds" described herein), a non-U.S. stockholder may be treated as having gain from the sale or other taxable disposition of a USRPI if (1) the non-U.S. stockholder disposes of the stock within a 30-day period preceding the ex-dividend date of a distribution, any portion of which, but for the disposition, would have been treated as gain from the sale or exchange of a USRPI and (2) acquires, or enters into a contract or option to acquire, or is deemed to acquire, other shares of that stock during the 61-day period beginning with the first day of the 30-day period described in clause (1).

        Estate Tax Considerations.     The value of our stock owned, or treated as owned, by a non-U.S. stockholder who is a nonresident alien individual at the time of his or her death will be included in the individual's gross estate for United States federal estate tax purposes, unless otherwise provided in an applicable estate tax treaty.

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Taxation of Holders of Our Debt Securities

        This discussion is of a general nature only. Our debt securities may have terms, such as conversion rights, adjustments to conversion ratios, provision for additional interest upon certain contingencies, or other features, that are not discussed herein and that may materially affect the U.S. federal income tax treatment of such debt security. You should carefully examine the applicable prospectus supplement or supplements and consult your own tax advisors with respect to debt securities with such features.

Taxation of Taxable U.S. Holders

        For purposes of this discussion, a "taxable U.S. holder" is a "U.S. holder" that is subject to U.S. federal income tax. The term "U.S. holder" as used herein means a beneficial owner of our debt securities that is a U.S. person as defined in "Taxation of Taxable U.S. Stockholders" above. A "non-U.S. holder" is a beneficial owner (other than a partnership or other pass-through entity) of our debt securities that does not meet the definition of a U.S. holder.

        Interest.     The stated interest on debt securities generally will be taxable to a U.S. holder as ordinary income at the time that it is paid or accrued, in accordance with the U.S. holder's method of accounting for United States federal income tax purposes.

        Original Issue Discount.     U.S. holders that own debt securities issued with original issue discount ("OID") will be subject to special tax accounting rules, as described in greater detail below. Those holders generally will be required to include OID in gross income in advance of the receipt of cash that corresponds to that income. However, such holders generally will not be required to include separately in income cash payments received on the debt securities, even if denominated as interest, to the extent those payments do not constitute "qualified stated interest," as defined below. If we determine that a particular debt security will be an OID debt security, we will disclose that determination in the prospectus supplement or supplements relating to those debt securities.

        A debt security will generally be treated as issued with OID if it has a "stated redemption price at maturity" (the sum of all payments to be made on the debt security other than "qualified stated interest") that exceeds its "issue price," provided that excess is not considered as " de minimis " as a result of being less than 0.25% of the stated redemption price at maturity multiplied by the number of complete years to maturity. The "issue price" of each debt security in a particular offering will be the first price at which a substantial amount of that particular offering is sold to the public. The term "qualified stated interest" means stated interest that is unconditionally payable in cash or in property (other than debt instruments of the issuer), and that meets all of the following conditions:

•

it is payable at least once per year;



•

it is payable over the entire term of the debt security; and

        it is payable at a single fixed rate or, subject to certain conditions, based on one or more indices.

        If we determine that particular debt securities will bear interest that is not qualified stated interest, we will disclose that determination in the prospectus supplement or supplements relating to those debt securities.

        If a U.S. holder owns a debt security issued with " de minimis " OID as previously described, such holder generally must include the de minimis OID in income at the times principal payments on the debt securities are made in proportion to the amounts paid. De minimis OID that is so included in income will be treated as capital gain.

        Debt securities may contain provisions permitting them to be redeemed prior to their stated maturity at our option and/or at the option of the holder. OID debt securities containing those features may be subject to rules that differ from the general rules discussed herein. Persons who are considering

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the purchase of OID debt securities with those features should carefully examine the applicable prospectus supplement or supplements and should consult their own tax advisors with respect to those features since the tax consequences to them with respect to OID will depend, in part, on the particular terms of the debt securities relating to such redemptions.

        U.S. holders that own OID debt securities with a term of more than one year generally must include OID in income in advance of the receipt of some or all of the related cash payments using the "constant yield method" based upon compound interest principles as described in the following paragraphs.

        The amount of OID that U.S. holders must include in income if they are the initial holders of an OID debt security is the sum of the "daily portions" of OID with respect to the debt security for each day during the taxable year or portion of the taxable year in which they held the debt security ("accrued OID"). The daily portion is determined by allocating to each day in any "accrual period" a pro rata portion of the OID allocable to that accrual period. The "accrual period" for an OID debt security may be of any length and may vary in length over the term of the debt security, provided that each accrual period is no longer than one year and each scheduled payment of principal or interest occurs on the first day or the final day of the accrual period.

        The amount of OID allocable to any accrual period is determined by first calculating the debt security's "yield to maturity." A debt security's yield to maturity is the discount rate that would cause the present value of all payments to be made on the debt security to equal the security's issue price. The OID allocable to an accrual period is then computed as the excess, if any, of:

•

the debt security's "adjusted issue price" at the beginning of the accrual period (generally, the security's issue price increased by the cumulative amount of accrued OID and decreased by the cumulative amount of payments other than of qualified stated interest) multiplied by the debt security's yield to maturity, over



•

the aggregate of all qualified stated interest allocable to the accrual period.

        Special rules apply for calculating OID for an initial or final short accrual period. We are required to provide information returns stating the amount of OID accrued on debt securities held of record by persons other than corporations and other exempt holders.

        Variable Rate Debt Securities.     Variable rate debt securities that provide for the payment of interest based on certain types of floating rates or so-called "objective" rates based on objective financial data are subject to special OID rules under which both the "yield to maturity" and "qualified stated interest" are determined as though the debt security bore interest in all periods at a fixed rate generally equal to the value of the floating rate or objective rate (as applicable) on the date that the debt security was issued or, in the case of certain debt securities, the rate that reflects the yield to maturity that is reasonably expected for the debt security. To the extent that the actual rate paid on the debt security for an accrual period differs from the assumed initial rate, appropriate adjustments are made to the amount of "qualified stated interest" or OID required to be included in income by the U.S. holder for such period. Additional rules may apply if either:

•

the interest on a variable rate debt security is based on more than one interest index; or



•

the principal amount of the debt security is indexed in any manner.

        This discussion does not address the tax rules applicable to debt securities with an indexed principal amount. In the event that we were to offer debt securities with indexed principal amounts, persons considering the purchase of those securities should carefully examine the applicable prospectus supplement or supplements and should consult their own tax advisors regarding the United States federal income tax consequences to them of holding and disposing of those debt securities.

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        If we determine that particular debt securities will be variable debt securities, we will disclose that determination in the prospectus supplement or supplements relating to those debt securities, and the U.S. federal income tax treatment of such debt securities will be more fully described in the relevant prospectus supplement or supplements.

        Contingent Payment Debt Securities.     If debt securities provide for variable rates of interest or other contingent payments but fail to qualify as variable rate debt securities under the rules described above, then the debt securities may become subject to the Treasury Regulations governing "contingent payment debt instruments" ("contingent payment debt securities"). Under these Treasury Regulations, a U.S. holder of contingent payment debt securities generally would be required to accrue interest income each taxable year based upon a "comparable yield" for a hypothetical fixed-rate debt instrument with no contingent payments but with terms and conditions otherwise similar to the contingent payment debt securities. We would be required to determine the comparable yield and prepare, solely for U.S. federal income tax purposes, a projected payment schedule that (i) includes all non-contingent payments and estimates of the amount and timing of all contingent payments on the debt securities and (ii) produces the comparable yield.

        If the actual contingent payments made on the contingent payment debt securities in a taxable year differ from the projected contingent payments set forth on the projected payment schedule, adjustments will be made for such differences. A net positive adjustment for the amount by which actual contingent payments during the taxable year exceed the projected contingent payments for such taxable year will be treated as additional interest income. A net negative adjustment for the amount by which actual contingent payments during the taxable year are less than the projected contingent payments for such taxable year will reduce the amount of interest required to be accrued in the current taxable year. The balance of any net negative adjustment will be treated first as an ordinary loss to the extent that the total interest inclusions previously accrued in respect of the contingent payment debt securities exceed the total amount of net negative adjustments treated as ordinary losses in prior taxable years and then as a negative adjustment in the succeeding taxable year.

        Upon the sale, retirement or other disposition of contingent payment debt securities, any gain recognized by a U.S. holder generally would be treated as interest income. Any loss arising from such a disposition would be treated as an ordinary loss to the extent of any prior interest inclusions not previously reversed by net negative adjustments as described above. The balance of such loss generally would constitute a capital loss.

        The U.S. federal income tax treatment of any debt securities treated as contingent payment debt securities subject to these Treasury Regulations will be more fully described in the relevant prospectus supplement or supplements. The rules regarding contingent payment debt securities are complex. U.S. debt holders should carefully examine the relevant prospectus supplement or supplements for any such debt securities and should consult their own tax advisors regarding the U.S. federal income tax consequences of the ownership and disposition of such debt securities before deciding to purchase such debt securities.

        Market Discount.     If debt securities are purchased for an amount that is less than their stated redemption price at maturity (or, in the case of OID debt securities, for an amount that is less than their adjusted issue price), the difference will be treated as "market discount" for United States federal income tax purposes unless that difference is less than a specified de minimis amount. Under the market discount rules, any principal payment on, or any gain on the sale, exchange, retirement or other disposition of, the debt securities must be treated as ordinary income to the extent of the market discount that the holder has not previously included in income. Generally, market discount is considered to accrue ratably over the remaining term of the debt security, although taxpayers may elect to accrue the discount using a constant yield methodology similar to that applicable to OID debt securities.

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        U.S. holders also may be required to defer, until the maturity of the debt securities or their earlier disposition in a taxable transaction, the annual deduction of all or a portion of the interest expense on any indebtedness which is incurred or continued to purchase or carry the debt securities to the extent of the market discount that is considered to accrue on those securities for that year. U.S. holders may elect, on a debt security-by-debt security basis, to deduct any previously deferred interest expense in a tax year prior to the year of disposition to the extent that the aggregate amount of interest on the debt security (including OID) exceeds the amount of interest expense on debt incurred or continued to purchase or carry the debt security. U.S. holders should consult their own tax advisors before making this election.

        U.S. holders may elect to include market discount in income currently as it accrues, on either a ratable or constant yield basis, in which case the rule described above regarding deferral of interest deductions will not apply. An election to include market discount in income currently, once made, applies to all market discount obligations acquired by the taxpayer on or after the first day of the first taxable year to which the election applies and may not be revoked without the consent of the IRS. Interested persons should consult their own tax advisors before making this election.

        Acquisition Premium.     If a U.S. holder acquires OID debt securities for an amount greater than their adjusted issue price but less than the sum of all amounts (other than qualified stated interest) payable with respect to the OID debt securities after the date of acquisition, the OID debt securities will be treated as acquired at an acquisition premium. For OID debt securities acquired with acquisition premium, the amount of OID that the U.S. holder must include in gross income with respect to the OID debt securities for any taxable year will be reduced by the portion of acquisition premium properly allocable to such taxable year.

        Amortizable Bond Premium.     If a U.S. holder purchases debt securities for an amount in excess of the sum of all amounts payable on the debt securities after the purchase date other than payments of qualified stated interest, the U.S. holder will be considered to have purchased the debt securities at a "premium" for U.S. federal income tax purposes. In such case, the U.S. holder generally may elect to amortize the premium over the remaining term of the debt securities, using a constant yield method, as an offset to interest includible in gross income with respect to the debt securities, and the U.S. holder would not be required to include OID, if any, in gross income in respect of the debt securities. In the case of debt securities that provide for alternative payment schedules, the amount of premium generally would be determined by assuming that a holder will exercise or not exercise options in a manner that maximizes the holder's yield, and that the issuer will exercise or not exercise options in a manner that minimizes the holder's yield. Any election to amortize premium would apply to all debt securities (other than debt securities the interest on which is excludable from gross income) held or subsequently acquired by a U.S. holder on or after the first day of the first taxable year to which the election applies and is irrevocable without the consent of the IRS. Prospective investors should consult their own tax advisors before making this election.

        Election to Treat All Interest as OID.     U.S. holders may elect to treat all interest in respect of debt securities as OID and to calculate the amount includible in gross income for any taxable year under the constant yield method described above. For purposes of this election, interest includes stated interest, acquisition discount, OID, de minimis OID, market discount, de minimis market discount and unstated interest, as adjusted by any amortizable bond premium or acquisition premium. If a U.S. holder makes this election for debt securities with amortizable bond premium, the election is treated as an election under the amortizable bond premium rules described above, and the electing U.S. holder will be required to amortize bond premium for all other debt instruments with amortizable bond premium held or subsequently acquired by the U.S. holder. The election to treat all interest as OID must be made for the taxable year in which the U.S. holder acquires the debt securities, and the election may not be

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revoked without the consent of the IRS. Prospective investors should consult their own tax advisors before making this election.

        Sale, Exchange or Retirement of Debt Securities.     A U.S. holder of our debt securities will recognize gain or loss upon the sale, exchange, retirement, redemption or other taxable disposition of the debt securities in an amount equal to the difference between:

•

the amount of cash and the fair market value of other property received in exchange for such debt securities, other than amounts attributable to accrued but unpaid stated interest, which will be subject to tax as ordinary income to the extent not previously included in income; and



•

the U.S. Holder's adjusted basis of the debt securities.

        The adjusted basis of the debt securities will, in general, be the U.S. holder's cost for the debt securities, increased by OID and any accrued market discount previously included in income and reduced by any amortizable bond premium previously allowable as a deduction and any cash payments on the debt securities other than qualified stated interest. Subject to the rules regarding market discount discussed above, any gain in excess of accrued interest not previously included in income by the holder or loss recognized will generally be capital gain or loss, and such capital gain or any loss will generally be long-term capital gain or loss if debt securities have been held by the U.S. holder for more than one year. Long-term capital gain for non-corporate taxpayers is subject to reduced rates of United States federal income taxation. The deductibility of capital losses is subject to certain limitations.

Taxation of Tax-Exempt U.S. Holders

        Exempt organizations are subject to tax on their unrelated business taxable income, or "UBTI." UBTI is defined as the gross income derived by an exempt organization from an unrelated trade or business less the deductions directly connected with that trade or business, subject to certain exceptions. Two of those exceptions are for interest (including OID) and gains and losses from the sale or exchange of property held for investment. Accordingly, income and loss attributable to holding our debt securities generally should not be treated as UBTI. However, if an exempt organization finances its acquisition of our debt securities with debt, a portion of any income or loss attributable to the debt securities will be includable in the organization's computation of UBTI pursuant to the "debt-financed property" rules. Prospective tax-exempt investors should consult their own tax advisors regarding these rules.

Taxation of Non-U.S. Holders

        The following is a discussion of the material U.S. federal income and estate tax consequences that generally will apply to a non-U.S. holder of our debt securities. The rules governing the U.S. federal income taxation of a non-U.S. holder of debt securities are complex and no attempt will be made herein to provide more than a general summary of such rules. Non-U.S. holders should consult their tax advisors to determine the effect of U.S. federal, state, local and foreign tax laws, as well as tax treaties, with regard to an investment in our debt securities.

        Interest.     In general, payments of interest on our debt securities to a non-U.S. holder will be considered "portfolio interest" and, subject to the discussions below of income effectively connected with a U.S. trade or business, backup withholding, and FATCA will not be subject to U.S. federal income or withholding tax, provided that:

•

the non-U.S. holder does not directly or indirectly, actually or constructively, own 10% or more of the total combined voting power of all classes of our stock entitled to vote within the meaning of Section 871(h)(3) of the tax code;

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•

the non-U.S. holder is not, for U.S. federal income tax purposes, a controlled foreign corporation that is related to us (actually or constructively) through stock ownership;



•

the non-U.S. holder is not a bank whose receipt of interest on our debt securities is described in Section 881(c)(3)(a) of the tax code; and



•

(a) the non-U.S. holder provides its name, address, and taxpayer identification number, if any, and certifies, under penalties of perjury, that it is not a U.S. person (which certification may be made on an IRS Form W-8BEN, W-8BEN-E or other applicable form) or (b) the non-U.S. holder holds our debt securities through certain foreign intermediaries or certain foreign partnerships, and the non-U.S. holder and the foreign intermediary or foreign partnership satisfy the certification requirements of applicable Treasury Regulations. Special certification rules apply to non-U.S. holders that are pass-through entities.

        If a non-U.S. holder cannot satisfy the requirements described above, payments of interest generally will be subject to the 30% U.S. federal withholding tax, unless the non-U.S. holder provides us with a properly executed (i) IRS Form W-8BEN or W-8BEN-E (or other applicable form) claiming an exemption from or reduction in withholding under an applicable income tax treaty or (ii) IRS Form W-8ECI (or other applicable form) stating that interest paid on the debt securities is not subject to withholding tax because it is effectively connected with the non-U.S. holder's conduct of a trade or business in the United States and includable in the non-U.S. holder's gross income.

        If (i) a non-U.S. holder is engaged in a trade or business in the United States, (ii) interest on the debt securities is effectively connected with the conduct of that trade or business and (iii) if required by an applicable income tax treaty, such interest is attributable to a U.S. permanent establishment or fixed base, then, although the non-U.S. holder will be exempt from the 30% withholding tax (provided the certification requirements discussed above are satisfied), the non-U.S. holder will be subject to U.S. federal income tax on the interest on a net income basis at regular graduated U.S. federal income tax rates, generally in the same manner as if the non-U.S. holder were a U.S. holder. In addition, if a non-U.S. holder is a foreign corporation, it may be subject to a branch profits tax equal to 30% (or a lesser rate under an applicable income tax treaty) of its effectively connected earnings and profits for the taxable year, subject to certain adjustments.

        Sale, Exchange or Retirement of Debt Securities.     Gain realized by a non-U.S. holder on the sale, redemption or other taxable disposition of our debt securities will not be subject to U.S. income tax unless:

•

that gain is effectively connected with the non-U.S. holder's conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, is attributable to a U.S. permanent establishment or fixed base); or



•

the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of that disposition and certain other conditions are met.

        If a non-U.S. holder is described in the first bullet point above, it will be subject to tax on the net gain derived from the sale, redemption, or other taxable disposition of the debt securities, generally in the same manner as if the non-U.S. holder were a U.S. holder. In addition, if a non-U.S. holder is a foreign corporation, it may be subject to the branch profits tax equal to 30% (or a lesser rate under an applicable income tax treaty) of its effectively connected earnings and profits for the taxable year, subject to certain adjustments. If a non-U.S. holder is an individual described in the second bullet point above, such holder will be subject to a flat 30% tax (or a lesser rate under an applicable income tax treaty) on the gain derived from the sale, redemption, or other taxable disposition, which may be offset by certain U.S. source capital losses, even though such holder is not considered a resident of the United States.

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Other Tax Considerations of Stockholders and Holders of Debt Securities

Medicare Tax on Net Investment Income

U.S. Stockholders and U.S. Holders of Debt Securities

        A 3.8% Medicare contribution tax generally is imposed on the net investment income of U.S. individuals, estates and trusts (other than certain exempt trusts) whose income exceeds certain threshold amounts. For this purpose, net investment income generally will include dividends on our stock (including capital gain dividends), interest payments on our debt securities and net gain from the sale of shares of our stock and of our debt securities. U.S. stockholders and U.S. holders of debt securities that are individuals, estates or trusts should consult their tax advisors regarding the applicability of the Medicare tax to any of their income or gains in respect of shares of our stock and our debt securities.

Non-U.S. Stockholders and Non-U.S. Holders of Debt Securities

        The IRS has indicated in Treasury regulations that this Medicare tax applies to non-U.S. stockholders and non-U.S. holders that are estates or trusts and have one or more U.S. beneficiaries. Non-U.S. stockholders and non-U.S. holders that are estates or trusts also should consult their tax advisors about the possible application of the 3.8% Medicare tax.

Information Reporting and Backup Withholding

U.S. Stockholders and U.S. Holders of Debt Securities

        Information returns may be filed with IRS in connection with payments of dividends on our stock, payments on our debt securities, and proceeds from a sale or other disposition of our stock or debt securities. These requirements apply even if withholding was not required with respect to payments made to a stockholder or holder of debt securities.

        If you are a U.S. stockholder or U.S. holder of debt securities, you will be subject to U.S. backup withholding at a rate of 28% on these payments if you fail to provide your taxpayer identification number to the paying agent or to comply with certain certification procedures or otherwise establish an exemption from backup withholding. U.S. stockholders and U.S. holders of debt securities should consult their own tax advisors regarding their qualification for an exemption from backup withholding and the procedure for obtaining an exemption. The amount of any backup withholding from a payment will be allowed as a credit against your U.S. federal income tax liability and may entitle you to a refund, provided that the required information is timely furnished to the IRS.

Non-U.S. Stockholders and Non-U.S. Holders of Debt Securities

        In general, a non-U.S. stockholder and a non-U.S. holder will not be subject to backup withholding with respect to payments of dividends or interest that we make, provided that (a) the non-U.S. stockholder or non-U.S. holder provides its name, address, and taxpayer identification number, if any, and certifies, under penalties of perjury, that it is not a U.S. person (which certification may be made on an IRS Form W-8BEN or other applicable form) or (b) the non-U.S. stockholder holds shares of our stock or the non-U.S. holder holds our debt securities through certain foreign intermediaries or certain foreign partnerships, and the non-U.S. stockholder or non-U.S. holder and the foreign intermediary or foreign partnership satisfy the certification requirements of applicable Treasury Regulations and we do not have actual knowledge or reason to know that the holder is a U.S. person, as defined above under "Taxation of Taxable U.S. Stockholders," who is not an exempt recipient.

        However, a non-U.S. stockholder and a non-U.S. holder will be subject to information reporting and, depending on the circumstances, backup withholding at the applicable rate with respect to the

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proceeds of the sale of shares of our stock and debt securities within the United States or conducted through certain U.S.-related financial intermediaries, unless the certification described above has been received, and the payor does not have actual knowledge or reason to know that a holder is a U.S. person, as defined above under "Taxation of Taxable U.S. Stockholders," who is not an exempt recipient, or the holder otherwise establishes an exemption.

        Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against a non-U.S. stockholder's or non-U.S. holder's U.S. federal income tax liability, provided that the required information is furnished timely to the IRS. The backup withholding and information reporting rules are complex, and non-U.S. stockholders and non-U.S. holders are urged to consult their own tax advisors regarding application of these rules to their particular circumstances.

U.S. Federal Income Tax Withholding Under FATCA

        Provisions of the tax code commonly referred to as the Foreign Account Tax Compliance Act ("FATCA"), generally impose a 30% withholding tax on dividends on our stock, interest on our debt securities and gross proceeds from the sale of shares of our stock and debt securities paid to a foreign entity unless (i) if the foreign entity is a "foreign financial institution", the foreign entity undertakes certain due diligence, reporting, withholding and certification obligations, (ii) if the foreign entity is not a "foreign financial institution," the foreign entity identifies certain of its U.S. investors, if any, or (iii) the foreign entity is otherwise exempt from FATCA.

        Withholding under FATCA generally (1) applies to payments of dividends on our stock and interest on our debt securities and (2) will apply to payments of gross proceeds from the sale of shares of our stock and debt securities made after December 31, 2018. Under certain circumstances, a non-U.S. stockholder or non-U.S. holder might be eligible for refunds or credits of such taxes.

        A non-U.S. stockholder or non-U.S. holder of debt securities resident in a country that has entered into an intergovernmental agreement with the U.S. with respect to FATCA will be exempt from FATCA withholding provided the holder and applicable foreign government comply with the terms of the agreement and the holder provides us with the appropriate documentation certifying the holder's status under FATCA. The scope of these requirements is potentially subject to material change and stockholders and holders of debt securities are urged to consult their tax advisers regarding the potential applicability of FATCA to their own situation.

State and Local Tax

        The discussion herein concerns only the United States federal income tax treatment likely to be accorded to us and our stockholders and holders of debt securities. No consideration has been given to the state and local tax treatment of such parties. The state and local tax treatment may not conform to the federal treatment described above. As a result, stockholders and holders of debt securities should consult their own tax advisor regarding the specific state and local tax consequences of the ownership and disposition of shares of our stock and our debt securities.

Legislative or Other Actions Affecting REITs

        The rules addressing the U.S. federal income tax treatment of REITs are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department which may result in statutory changes as well as revisions to regulations and interpretations, possibly with retroactive effect. Recently enacted tax legislation significantly changed the U.S. federal income tax laws applicable to businesses and their owners, including REITs and their stockholders. Technical corrections or other amendments to such legislation or administrative guidance interpreting it may be issued at any time. Prospective investors are urged to consult with their tax advisors regarding the effect of potential changes to the federal tax laws on the ownership and disposition of any stock, depositary shares or debt securities in an entity electing to be taxed as a REIT.

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